Vhat is treasury shares? If you are an investor, you must have heard this phrase. To learn more about the concept, characteristics and benefits of treasury shares, Filipinance.com will introduce you to the following article.
Table of Contents
- 1 What is treasury shares?
- 2 What are the basic features of treasury shares?
- 3 5 reasons why enterprises buy treasury shares
- 4 Regulations on buying and selling treasury shares
- 5 What are the conditions for redemption of treasury shares?
- 6 How to buy and sell treasury shares
- 7 Principles of determining the buying and selling price of treasury shares
- 8 What is the purpose of buying and selling treasury shares
- 9 Enterprises buying reasury shares has positive or negative meaning
- 10 Conclusion
Treasury shares are a type of security. The name treasury shares refers to shares issued by the joint stock company itself and redeemed by the issuing company with legal capital.
Because of this special nature of treasury shares, when trading, the Stock Exchange also has instructions on its own conditions and procedures.
The situation of the Covid – 19 epidemic is stressful all over the world, directly affecting the production and business results of enterprises. Against that backdrop, quite a few companies choose to buy back treasury shares. Treasury shares are stocks with the following characteristics:
- Treasury shares are not counted as outstanding shares. Therefore, when the percentage of treasury shares increases due to the repurchase of the underlying shares, the number of outstanding shares will decrease.
- Owners of treasury shares are not paid dividends, have no voting rights, and do not have the right to buy new shares.
- The number of treasury shares is limited in accordance with the law. The current prescribed rate is up to 30% of the total number of ordinary shares sold on the market.
- Not included in earnings per share EPS.
- The total number of treasury shares is not allowed to exceed the capitalization rate.
When buying and selling treasury shares, the enterprise does not record profit or loss, but only records the increase or decrease in capital sources and capital surplus.
With the above characteristics, an enterprise will use treasury shares when operating according to market signals to ensure the benefit of the business. There are 5 important reasons for a business to decide to invest in its own treasury shares, including:
Buy to resell
When the business has excess cash, the market signal shows that the market price of the company is undervalued compared to the value of the company and no investment has been found, the business can make a purchase of shares of the company. the business itself with the expectation that the price will increase in the next period.
When the market is positive, the stock price is high, the enterprise executes an order to sell treasury shares at a higher price. The difference is not recorded in profit on the books, but still brings cash to the business.
Increased business control
When buying treasury shares, it will reduce the number of underlying shares on the market. Therefore, this move often comes from businesses wanting to reduce control.
In case the company buys treasury shares and cancels it, it will also affect the company’s charter capital to decrease.
When the market shows a signal that the company’s stock price is going down, the move to buy back treasury shares is also a way for enterprises to manage the risk of devaluation, increasing shareholders’ confidence in the business activities of the enterprise. . The number of shares on the market decreases, the supply of stocks decreases, is the driving force to stabilize stock prices. Thereby increasing benefits for shareholders.
ESOP stock recall
ESOP shares are preferred shares reserved for employees of the company. This is how many companies motivate employees to work harder.
Through the act of buying back ESOP shares and then reselling them to employees at a favorable price, the company will strengthen employees’ attachment to the business.
There are quite a few indicators related to the number of shares outstanding. Therefore, when the number of treasury shares increases, the financial performance indicators calculated on the capital of the enterprise increase such as EPS – earnings per share, ROE – return on equity.
The Securities and Exchange Commission has issued Circular No. 203/2015/TT-BTC dated December 21, 2015, guiding transactions on the stock market and Circular No. 130/2012/TT-BTC guiding the redemption of securities. shares, selling treasury shares and in some cases issuing additional shares of public companies. Including instructions on some contents of treasury stock trading.
In order to redeem its own shares as treasury shares, a public company needs to meet the following conditions:
- There is a resolution unanimously approved by the General Meeting of Shareholders or the Board of Directors. In case of acquisition of no more than 10%, a resolution of the Board of Directors is required. From 10% to 30% need a resolution of the General Meeting of Shareholders.
- There is enough capital to buy back treasury shares. Capital sources include: Capital surplus; Remaining profit; Other sources as prescribed by law.
- There is a plan to buy back with a specific time and principles for determining the price.
Conditions for selling treasury shares include:
- After at least 06 months from the closing date of the latest redemption. Except for selling as bonus shares for employees or correcting transaction errors.
- There is a resolution unanimously approved by the General Meeting of Shareholders or the Board of Directors.
- Designate a securities company to perform.
The purchase and sale of treasury shares must comply with the trading regulations of the Stock Exchange. For example, listed organizations, organizations registered for trading are not allowed to announce the specific price to be executed, but only to announce the principle of determining the transaction price that has been approved by the General Meeting of Shareholders. (if any).
In the case of a public company that has not yet been listed, the purchase and sale shall be done through a securities company.
Trading of treasury shares is done at the matching price on the exchange or the agreed price determined according to the following principles:
- Bid price ≤ Reference price + (Reference price * 50% Stock price fluctuation range).
- Asking price ≥ Reference price – (Reference price * 50% Stock price fluctuation range).
As a rule, when following the order matching method, the total volume is from 3-10% of the registered trading volume in each trading day.
When buying and selling treasury shares, the business wishes to achieve the following purposes:
- Bring confidence to investors.
- Motivate employees.
The enterprise buys treasury shares to increase the company’s reputation among investors. Investors are also assured to continue to hold stocks, avoiding the case of stock sell-offs that will affect the company in the long run.
When employees receive benefits from buying treasury shares, employees will be responsible for the overall operation of the business. Many businesses are willing to choose this way, sacrificing immediate money in exchange for long-term dedication.
Enterprises buying treasury shares means having the following positive and negative aspects:
Helps stabilize or increase stock prices in the short term. The shareholder structure is more concentrated, avoiding dilution and reducing the impact on the business.
It is a reasonable investment in case the enterprise has idle capital and the future market is expected to develop.
Buying treasury shares is risky when the stock price goes lower, unsoldable.
May increase risk of debt/equity ratio.
Financial parameters often do not take into account treasury shares, causing information asymmetry with small shareholders.
What is treasury stock has been informed to customers by Filipinance.com in the article above. Treasury stock is a financial instrument that is linked to a company’s share price. To make a decision to buy and sell treasury shares, it is necessary to comply with legal regulations.